Meeting the Challenges of Megacities in the Developing World

A Collection of Working Papers

National Research Council
May 1996



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Meeting the Challenges of Megacities in the Developing World A Collection of Working Papers National Research Council May 1996

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NOTICE: The project that is the subject of these working papers was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the panels responsible for the working papers were chosen for their special competence and with regard for appropriate balance. The working papers have been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Harold Liebowitz is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce Alberts and Dr. Harold Liebowitz are chairman and vice chairman, respectively, of the National Research Council. The Office of International Affairs (OIA) is concerned with the development of international and national policies to promote effective application of science and technology to economic and social problems facing both industrialized and developing countries. OIA participates in international cooperative activities, engages in joint studies and projects with counterpart organizations, manages scientific exchange programs, and represents the Academy complex at many national and international meetings directed toward facilitating international cooperation in science and engineering. Dr. F. Sherwood Rowland, Dr. Harold Forsen, and Dr. David Rall are the foreign secretaries of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine, respectively. The papers have been prepared by the Panel on Improving Labor Markets, the Panel on Sustainable Water and Sanitation Services, and the Panel on Transportation Options. The overall study has been coordinated by the Committee on Megacity Challenges. Support for the project and for these working papers was provided by the National Research Council. Copies of this collection of papers are available for sale from: National Academy Press 2101 Constitution Avenue, N.W. , Box 285 Washington, DC 20418 Tel: 1-800-624-6242 or 202-334-3313 (in the Washington Metropolitan Area). Copyright © 1996 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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COMMITTEE ON MEGACITY CHALLENGES Members George Bugliarello, Chair, Polytechnic University Albert F. Appleton, Regional Plan Association Jordan J. Baruch, Jordan J. Baruch Associates John Boland, Johns Hopkins University Michael Cohen, The World Bank Nancy R. Connery, Consultant, Woolwich, M.E. Roland Fuchs, Global Change System for Analysis, Research and Training Ralph Gakenheimer, Massachusetts Institute of Technology Richard Kahan, Urban Asssembly John Kasarda, University of North Carolina Caroline Moser, The World Bank Harry Richardson, University of Southern California F. Sherwood Rowland, National Academy of Sciences National Research Council/Office of International Affairs Staff Judith Bale, Study Director Maki Fife, Senior Program Assistant Barbara Krause, Senior Program Assistant

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PREFACE In the next 30 years, the world’s population is expected to increase by 2.5 billion persons. Most of this growth will occur in the cities of developing countries, which are adding about 55 million residents a year. These working papers are focused on the megacities--defined here as large, rapidly growing cities of 8 million or more residents. Megacities merit special attention because of the magnitude of their population increases and the enormity of the challenges involved in providing services to such rapidly growing populations. At the same time, many of the innovations and changes discussed in these papers are applicable to a broad range of cities. Early recognition of future growth can enable a city to address challenges before they become overly complex or expensive. In the twenty-first century, the economic and social development of urban areas will be influenced by continued global economic integration and the need for a nation’s commerce to be competitive in the global economy. City businesses will have to compete for investment and export markets in the global marketplace. A successful transition from industries relying on low-wage labor and cheap raw materials toward technology- and knowledge-based systems of production and services will require better-educated and more-skilled workers, effective infrastructure, and responsive public and private organizations. In the two decades since the United Nations Conference on Human Settlements (Habitat) was held in Vancouver, there have been significant advances in both technologies and management strategies that can be applied to address megacity challenges. Nevertheless, rapid urbanization has outpaced the ability of governments to provide adequate shelter and basic services to the urban poor. Given the increasing importance of these challenges, the world’s academies of science and engineering were asked by Dr. Wally N’Dow, Secretary General of the Second United Nations Conference on Human Settlements, to organize a scientific forum that would develop a joint statement for presentation to the United Nations delegates at the Conference on Human Settlements (Habitat II) in Istanbul in June 1996. The U.S. National Academy of Sciences/National Research Council is also undertaking a study of the many challenges faced by megacities in the developing world. Results of the full study are scheduled for publication later this year by the National Research Council. The working papers presented here--on labor markets, water and sanitation services, and transportation--have been prepared for that study by three panels of the National Research Council.

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Options for Improving Labor Markets for Megacities in the Developing World A Working Paper Commission on Behavioral and Social Sciences and Education

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PANEL ON IMPROVING LABOR MARKETS Members Harry Richardson, University of Southern California, Chair Jere R. Behrman, University of Pennsylvania Ellen M. Brennan, United Nations Alejandra Cox Edwards, The World Bank Subbiah Kannappan, Michigan State University National Research Council Staff Barney Cohen, Commission on Behavioral and Social Sciences and Education Trish DeFrisco, Commission on Behavioral and Social Sciences and Education Connie Reges, Office of International Affairs

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EXECUTIVE SUMMARY Development experts are concerned with fostering economic growth, alleviating poverty, protecting the environment, and improving the general standard of living of people in developing countries. Much of this work is directed toward either creating employment or raising labor earnings because at the bottom of the earnings scale, labor earnings comprise the most significant portion of total income, and hardship and poverty are often the direct results of insufficient access to adequate employment opportunities. Developing countries span a wide range of income and development levels, and their megacities reflect these differences. Yet most of the megacities share some key labor market characteristics: a formal manufacturing sector that is usually dwarfed (in employment terms) by the service sector; a large government sector, often riddled with inefficiencies; and an informal sector whose size depends on the level of economic development, business cycle influences, and the degree of government tolerance and support. Moreover, almost all megacities have been impacted substantially by globalization and the opening up of world markets; these trends have accelerated the need for increasingly flexible labor markets. This paper addresses the problem of the need to expand productive capacity in developing-country megacities in order to create a billion new jobs over the next 35 years. Labor markets in developing-country megacities are vulnerable to several problems that may be amenable to policy intervention. These include the following: Unemployment and low-productivity employment Poverty and income inequality Job mobility constraints Lack of protection for workers Big firm bias What policy prescriptions are available to alleviate some of these conditions? Depending on the extent of market failure and the importance assigned to distributional issues, governments are probably most effective in improving urban labor markets when they assume a modest role (World Bank, 1995a). The most promising opportunities for alleviating megacity labor market problems through policy intervention are as follows.

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The promotion of economic growth and economic (and political) stability. Economic growth offers the best guarantee of expanded employment opportunities, higher wages, and labor productivity growth. Appropriate macroeconomic policies (e.g., fiscal discipline, control of inflation, and financial reforms), combined with both tariff and nontariff trade liberalization, offer the most promising strategy for promoting employment growth and generating enough resources to pay for the infrastructure investments needed to achieve income equity. For this strategy to work efficiently, the economy in general and the labor market in particular need to adjust quickly to changing market conditions. Many developing countries have labor policies in place (such as minimum wage laws, job security provisions, job-related housing provision, pension systems, and centralized--often government-controlled--labor unions) that, when enforced (often they are not), aggravate labor market distortions and impede adjustments. Deregulation of the labor market offers prospects for increasing its flexibility, especially by recognizing that policy interventions should work with rather than against market forces and should pay attention to the incentives driving the behavior of individuals and households. At the same time, improved access to credit markets for potential entrepreneurs, as well as to job information and to skills acquisition for potential employees, can help megacities’ labor markets run more efficiently. Whereas redistribution policies tampering with spatial (geographical) variations in labor supply and demand are unlikely to be effective, efficiency-oriented urban policies (e.g., low-cost improvements in transportation, broadly based educational investments, privatization of government services, access to credit for small-scale enterprises, and creation of a favorable entrepreneurial environment) can promote labor productivity growth and improve the competitive efficiency of megacities, directly impacting macroeconomic performance. Finally, with respect to the role of science and technology, more rapid diffusion of known and already widely applied technologies (e.g., computer information systems, cellular telephones) may transform the structure and composition of employment in developing-country megacities, especially given the global competitive environment. These and similar measures will be critical to avoid widespread urban unemployment and underemployment in the megacities of the developing world.